Is Britain's economy sounding a warning?

As austerity measures take effect, the UK economy contracts.

LONDON, United Kingdom — Britain's coalition government continued to be the canary in the coal mine for the indebted world's economies (formerly known as the first-world economies) — and the bird is starting to choke. The Conservative-led coalition has imposed a strict austerity regime on government spending in the hope of eliminating Britain's structural deficit by 2015.

But preliminary figures released yesterday showed Britain's economy contracted in the last quarter of 2010. That puts Britain halfway toward a double-dip recession. The Office of National Statistics, which provided the numbers, put some of the decline down to unusually bad winter weather in December, but even factoring that into account there was no growth.

The opposition Labour Party and Keynesians everywhere had predicted that cutting government spending as fast and furious as Chancellor of the Exchequer George Osborne is doing would lead to a decline in economic activity. Britain emerged from recession last year, while Labour was still in government and modestly stimulating the economy, rather than cutting the deficit.

What is worrisome is that the cuts haven't really even begun to bite. Lay-off notices are only just going out in national and local government departments. Things will get much worse before they get better — if they get better. Even with the economy contracting inflation is heading up toward an annual rate of between 4 and 5 percent.

Yesterday, Mervyn King, governor of the Bank of England, told a business audience in the northern city Newcastle, "Given the rise in VAT and other price rises this year, real wages are likely to fall again. As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years."

Despite the hardship, King endorsed the government's austerity program. As he earns £290,000 a year (about $460,000) perhaps he feels he can be sanguine about his salary being worth what it was six years ago.

The choking canary that is the world's sixth largest economy doesn't seem to be dampening spirits at the World Economic forum in Davos, however. The 14th annual study by accounting firm PwC of 1,200 CEO's in 69 countries, released in time for the annual ski-and-talk fest, found their confidence returning to pre-economic crisis levels.

Underlining this sense that things may be getting better even though in Britain they manifestly are getting worse is the news that the first issue of bonds to fund the European Financial Stability Facility — set up in the wake of the Irish economies collapse — is oversubscribed. The 5 billion euros worth of paper was enthusiastically snaffled up by Asian banks and investors, because they offer high interest rates and are seen to represent the financial strength of Germany and France. Interestingly both countries have deficits but aren't resorting to harsh austerity measures to deal with it.